Imposing risk to eliminate risk – does it work?

June 12, 2014

Writing in the Financial Times, John Kay examines the health and safety regime that has impacted many industries and societies in recent years.

He concludes that, while the ‘health and safety culture’ is often ridiculed, the positive effects are substantial. Road accidents and industrial accidents have shown massive and continuing decline, surpassed now by self-inflicted injury. These improvements have been achieved through public policy – a range of legislation that has made risky behavior both unacceptable and uneconomic for employers to tolerate.

There are analogies here to what has been happening in contracting. Historically, suppliers accepted little responsibility for their products and services. Globalization and the explosion of competition altered the balance of power – and steadily, buyers demanded that suppliers should assume more risk for the effectiveness of their products or services.

The result was that suppliers had to start focusing on how they would extend their commitments (for competitive differentiation) and meet them (to ensure revenue, profit and customer satisfaction). And in consequence, we see an increasing number of contract commitments are being fulfilled, with suppliers frequently taking direct responsibility for outcomes.

Over recent years, many suppliers complained about the ‘unreasonable’ attitudes and demands of their customers in the allocation of risk. But as with health and safety, perhaps this was the only way to drive improvement and change. Faced with unsustainable levels of risk, suppliers have been forced to become more creative and more adept and ensuring their promises are fulfilled.